The SMF says the high cost of childcare 'effectively locks thousands of parents out of work each year'. Photograph: The Photolibrary Wales/Alamy

Parents should be able to borrow money from the government to cover childcare costs to make it more financially viable for them to return to work, a thinktank has suggested.

The Social Market Foundation (SMF) has proposed a National Childcare Contribution Scheme which would allow parents to borrow up to £10,000 to pay for childcare, which they would then pay back through their wages in a system similar to student loans.

The SMF said the proposals, which were set out in a report called A Better Beginning: Easing the cost of childcare, would extend access to formal childcare to more children and families by allowing parents to spread the cost without creating additional costs for the government.

It argues that "high-quality formal childcare has a critical role to play in substantially improving the development of all children", but says it is becoming increasingly difficult for those on low incomes to afford it.

"For many parents, mothers in particular, the cost of childcare is too high and often makes paid employment financially unviable," the report said.

"In the summer of 2011, following the coalition government's cut in support through the childcare element of the working tax credit, a quarter of parents living in severe poverty reported that they had given up their job because the costs of childcare were too expensive."

The proposed scheme will be available to all working parents with a child under school age, and those who applied would be given the money upfront through a voucher scheme. The loan would attract interest at 3% above inflation as measured by RPI (currently 4.8%), and the main earner would repay at a rate of 6% of earnings above the personal allowance (£8,105 for 2012-13).

Someone earning £20,000 would make repayments at a rate of £60 a month, which would stop once the loan was repaid or after 20 years.

The report's co-author and SMF director Ian Mulheirn said: "The high cost of formal childcare effectively locks thousands of parents out of work each year, and costs are set to continue to rise.

"This is bad for families and bad for the economy, but in the context of tight public finances more public spending on childcare is simply unrealistic in the next few years."

He added: "Our scheme offers a viable, practical and fair alternative, and is a fantastic example of how government can help families in tough times without incurring additional spending commitments."

The SMF recommends the scheme be implemented after a pilot, and is presenting its findings to the three main political parties.

Anand Shukla, chief executive of national childcare charity Daycare Trust, welcomed the proposals, but warned they would not help families on low incomes.

"By allowing families to spread childcare costs over a longer period of time, and offering protection to those who may suffer loss of earnings during the repayment period, there are benefits to this scheme for working parents, particularly those on middle incomes or who have the potential to enter skilled employment in the future," he said.

"However, it will not solve all of the problems that prevent the poorest families accessing childcare, including the need to sign up to a long-term nursery contract when work may be unstable, a lack of viable employment opportunities and a fear of falling into debt."

A spokesperson for the Department for Education said the government was already investing heavily in the costs of childcare via the tax credits system.